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U.S. Supreme Court Overturns Physical Presence Standard for Sales and Use Tax

June 28, 2018

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The Decision is a Huge Victory for States and Traditional Brick-and-Mortar Retail Stores

After much anticipation, on June 21, 2018, the U.S. Supreme Court rendered a close 5-4 decision in the South Dakota v. Wayfair case, overturning the physical presence standard for sales and use tax nexus that has been in place for 26 years.

At issue in Wayfair was a South Dakota statute passed in 2016 that required out-of-state retailers to collect and remit sales tax if the retailer had: 1) delivered more than $100,000 of goods or services into South Dakota, or 2) engaged in more than 200 transactions for the delivery of goods or services to South Dakota. The statute was an attempt to circumvent the physical presence requirement of Quill Corp. v. North Dakota in 1992, and invited significant legal challenge.

Writing for the majority opinion, Justice Anthony Kennedy stated a number of reasons for overturning Quill’s physical presence standard. First, the statute applies a safe harbor for retailers that only transact a limited amount of business in South Dakota. Second, the statute ensures there can be no retroactive obligation to remit the sales tax. Third, South Dakota is one of more than 20 states that have adopted the Streamlined Sales and Use Tax Agreement, which strives to standardized taxes to reduce administrative and compliance burdens.

In light of the Supreme Court upholding of the South Dakota statute, other states will likely pass similar statutes in order to reach out-of-state retailers. Although the Court did overturn the physical presence standard, it was careful to observe that the South Dakota statute had safeguards to minimize any undue burden on interstate commerce.

The Wayfair decision represents a major victory for states, which are estimated to lose between $8-33 billion in revenues annually due to the physical presence test. And traditional brick-and-mortar stores will now have a more level playing field when competing with internet giants that do not have a physical presence in-state.

If you have any questions, please contact your CSH State and Local Tax Advisor.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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